Delete from cart: E-commerce M&A withers as specter of distress looms

Data InsightDealspeak 31 October

Delete from cart: E-commerce M&A withers as specter of distress looms

For many ecommerce players, too many consumers have been emptying their online shopping carts.

During the early days of the pandemic, the locked-down masses shopped for everything online, leading to a massive acceleration in ecommerce adoption followed by a dealmaking fever dream.

Two years later, people have woken up to reality. Ever since ecommerce as a proportion of total sales hit 16% in 2020 from 11% in 2019, it has slightly declined and then plateaued, as consumers diverted their money to eating out, concerts and travel instead.

Shares of companies that had billion-dollar market capitalizations during the time of peak valuations in 2021, now trade at pennies on the dollar. It means the specter of distressed M&A is not far away.

That is especially true for brand aggregators — companies that buy up consumer brands sold on Amazon and other online shops. Thrasio, a startup that raised USD 3.4bn to acquire such brands, reportedly engaged restructuring advisers last month. Another aggregator, Benitago, filed for chapter 11 in August and last month was looking for a buyer for its Acrux brand, less than two years after raising USD 325m in venture funding. 

Shriveling valuations

Mergermarket data show M&A and capital raises involving ecommerce companies peaked in 2021, when 314 deals totaling USD 57.9bn were agreed to in North America. Since then, activity has plummeted to 86 deals worth US 2.3bn year to date (as of 31 October). Transactions include not just online retailers, but those providing software for supply chains, logistics and inventory management; software for online stores, discovery search and review websites; as well as meal delivery and shipping software.

North American brand aggregators that have raised the most, according to industry tracker Marketplace Pulse, include Thrasio (USD 3.4bn raised), Perch (USD 908m), Heyday (USD 800m), and Dragonfly (USD 500).

A prime example of how quickly things soured is Aterian [NASDAQ:ATER], which owns the ‘Squatty Potty’ brand, among several others, and sells on Amazon and other websites. In 2020 and 2021, government handouts, low interest rates, and people stuck at home combined to create an ecommerce spending boom from which Aterian benefited. Its sales more than doubled to USD 248m in 2021 from two years earlier. Investors cheered, sending its market cap soaring to USD 1.3bn in early 2021. Then the COVID-19 vaccines were rolled out, consumers spent on travel and restaurants instead of home goods, and gummed-up supply chains and soaring container costs squeezed ecommerce companies.  Analysts now expect Aterian’s 2023 sales to drop to USD 140m. Meanwhile, its market cap has shrunk to USD 24m.

Future deals [NASDAQ:AMZN] has been able to better mask the downturn by increasing prices, said one industry executive. The ecommerce behemoth’s revenue has continued to climb, although at a slower pace. By contrast, the aggregators selling products on Amazon have lacked the scale to do so. “They took out a lot of debt [to buy several different brands] and now they can’t service the debt,” said the executive. “There will be opportunities for acquisitions or maybe lift outs — either voluntarily or through bankruptcies.”

Amazon remains dominant with a 55% ecommerce market share, although industry watchers believe Walmart [NYSE:WMT] offers perhaps the biggest growth opportunity, and Shopify [NYSE:SHOP] enables companies to sell on their own websites. Then there are pure-plays: In grocery delivery there is Instacart [NASDAQ:CART]; in beauty, Sephora; for crafts, Etsy [NASDAQ:ETSY]; and in home goods, Target [NYSE:TGT]. Many have made acquisitions to drive their e-commerce strategy. What could they buy next? Here are some ideas.

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